Whether it is part of your EOFY planning, or a proactive, long term measure, Tax Planning should always be a front of mind financial strategy for businesses and individual investors alike. So what is tax planning, and why should you be focused on it?
Tax planning forms an important element of wealth creation for a business, and individual, and should form an essential part of your business’ financial strategy and/or individual investor’s financial plan. Focusing on areas such as salary packaging, investments, superannuation, and tax deductible debt can result in creating significant tax savings when managed correctly. By investing in structuring your finances through a tax planning lens, you can minimise and manage the amount of tax you pay, while creating longer term wealth. Investopedia defines tax planning as
Tax planning is the analysis of a financial situation or plan to ensure that all elements work together to allow you to pay the lowest taxes possible. A plan that minimizes how much you pay in taxes is referred to as tax efficient.
Tax planning should not be confused with Tax Avoidance, which are illegal schemes designed to exploit tax and superannuation systems. the ATO has further guidance on this:
You have the right to arrange your financial affairs to keep your tax to a minimum. This is often referred to as tax planning, or tax-effective investing. Tax planning is legitimate when you do it within the intent of the law. However tax minimisation schemes that are outside the spirit of the law may attract our attention. We refer to these as tax avoidance schemes or arrangements.
Four key reasons tax planning should be on your radar
In addition, tax planning is not the same as preparing an income tax return. Lodging a return is the process of preparing and sending your relevant tax information to the Australia Taxation Office to ensure you are correctly paying your taxes. Tax planning on the other hand analyses your tax affairs ahead of time and explore options that will help you decrease your tax liability. Here are four reasons why tax planning is important:
Minimising your liability
All taxpayers have the right to arrange their financial affairs in such a way that minimises their tax liability. Effective tax planning ensures that you are paying your precise share of tax (and not a cent more) through the most efficient use of deductions, allowances, exclusions and exemptions. With tax laws constantly changing, planning your finances and developing tax reduction strategies ahead of time is one of the most effective ways to ensure you are taking advantage of any government incentives and paying the right amount of tax. This is especially relevant due to the various tax incentives in place in response to the Covid-19 pandemic.
Meet your trustee obligations
With the ATO increasing their scrutiny of trust arrangements, it is critical that trust distributions are appropriately considered and resolutions are made before the end of the financial year. This often requires a review of year-to-date results and the calculation of tax estimates. Trustees should also carefully consider how income will be distributed, as beneficiaries will have a legal entitlement to draw on their entitlement. In addition, anti-avoidance provisions can apply where another person benefits from the income distributed to a beneficiary. Careful tax planning will help to prevent unwanted surprises if the ATO ever come knocking!
More business control
Implementing a tax plan within your business will ensure that you are on target to achieving your business goals. An effective tax planning strategy will allow you to forecast your future tax obligations with greater accuracy. Having this knowledge in advance can assist with critical cash flow planning, as well as allowing more control over when taxes are paid.
As mentioned, tax planning is an effective way of gaining insight into your future position. Developing a forward-looking approach will allow you to actively plan your investments and take advantage of any available exemptions and deductions. Planning your investments early will allow you to maximise efficiency and ensure you receive the highest returns.
Areas you should consider for Tax Planning
- Capital Gains
- Averaging Income
- Personal Services Income
- FX Gains/Losses
- Accounts Receivable/Bad Debts
- Depreciation/Immediate Write-offs/Building Write-offs
- Staff Bonuses
- Stock on Hand
- Farm Management Deposits (“FMD”)
- Capital gains tax rollovers
- Directors and shareholders with loans
- Existing Division 7A loans and sub-trust arrangements
- Non-commercial loss rules
- Alienation of personal services income rules
- Availability of the government’s superannuation co-contribution for low income earners
Are you tax planning as part of EOFY?
Each year we publish a tax planning guide for EOFY covering much of the above in more detail, alongside any changes to legislation that may assist (or hinder!) your planning. You can read our latest EOFY tax planning guide here.